Industry Capital, Operating and Geopolitical DevelopmentsSector Case Example in Iron Ore

Rebecca GordonCRU StrategiesJune 2013

Chancery House

53-64 Chancery Lane

London

WC2A 1QS

UK

Tel: +44 20 7903 2000

Fax: +44 20 7903 2172

517, Tower 2

Bright China Chang An

Building

7 Jianguomennei Avenue

Beijing 100005, China

Tel: +86 10 6510 2206

Fax: +86 10 6510 2207

Augusto Leguía Norte

Nº 100 of.506

Las Condes

Santiago

Chile

Tel: +56 2 2231 3900

Fax: +56 2 2231 4314

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Langley

WA 98260

USA

Tel: +1 360 321 4707

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Next to Kohinoor Hotel

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India

Tel: +91 22 6687 5757

Fax: +91 22 66875758

Preamble – what is the world worried about?

2

» Capital – the scarcest of all commodities?

» Focus on iron ore- What happened last year?

- Outlook for 2013 and beyond

- Kazakhstan vs West Africa : high level comparison

Presentation Outline

… and what does it mean for our industry?

What is keeping investors awake at night?...

World Economic Forum Top 10 predictions suggest worst is behind us...

Data: World Economic Forum, CRU. 3

1. US Fiscal Fight Fears abating, economy warming

2. Eurozone CRU base case improved from ‘terrible’ to ‘bad’

3. Chinese Growth Transition continuing–slow and steady is good

4. Emerging Markets Domestic demand in ASEAN staying strong

5. Commodity Prices Sideways movement on average, slightly –ve for oil

6. Inflation Money looking for a home, but wary = easing inflation

7. Central Banks “Aggressive easing” – what does this mean?

8. General Fiscal Policy Developed economies need austerity

9. US$ US$ strengthening vs. €/Yen, staying flat elsewhere?

10. General Risks Risks are more balanced than in previous 5 years

...and what might this mean for mining?

Rising tide that floats all boats has receded – but opportunities exist...

4

1. US Fiscal Fight Fears abating, economy warming

2. Eurozone CRU base case improved from ‘terrible’ to ‘bad’

3. Chinese Growth Transition continuing–slow and steady is good

4. Emerging Markets Domestic demand in ASEAN staying strong

5. Commodity Prices Sideways movement on average, slightly –ve for oil

6. Inflation Money looking for a home, but wary = easing inflation

7. Central Banks “Aggressive easing” –what does this mean?

8. General Fiscal Policy Developed economies need austerity

9. US$ US$ strengthening vs. €/Yen, staying flat elsewhere?

10. General Risks Risks are more balanced than in previous 5 years

» Lower % growth is still big absolute volume growth

» Other populous areas may enter more metal intensive phase, albeit slowly

» We are now used to $100/bbl oil, our forecasts see this as stable, +ve for costs

» Easing inflation good for most, might be bearish for gold?

» Finance is still a big issue

» US$ relatively flat – removing a potential price driver – but US economy has low metal intensity

Demand is there for new projectsBut investors have more choice now

Cobalt

Alumina, Sulphuric Acid

Platinum, Manganese, Aluminium, Gold, Phosphate DAP, Met Coke

Zinc, Copper, Silver, Palladium, Sulphur

Coking Coal, Tin, Lead, Nickel, Urea, Potash, Ammonia

Iron ore

CRU Commodity Heat for 2013: prices remain flat

CRU expects a lacklustre year for commodity prices: 9of 22 commodity prices will rise over 2013 while 13 will see declines. None of the commodity is expected to sit in Hot & Freezing extremes

DATA: CRU, 2013 annual average price forecast (nominal $ or benchmark) versus 2013 Q1 average actual prices 5

Hot> 15%

Warm5% to 15%

Cold-5% to 15%

Freezing< -15%

Mild0% to 5%

Cool0% to -5%

CRU Commodity Heat for 2017

CRU expects commodity prices to increase 14% on average out to 2017. 13 of 22 commodity prices will rise out to 2017 while other 9 will see declines.

DATA: CRU, 2013 annual average price forecast (nominal $ or benchmark) versus 2013 Q1 average actual prices. 6

Hot> 15%

Warm5% to 15%

Cold-5% to 15%

Freezing< -15%

Mild0% to 5%

Cool0% to -5%

Coking Coal, Alumina, Cobalt, Nickel, Platinum, Palladium, Zinc, Tin, Met Coke, Sulphuric Acid

Aluminium, Lead, Phosphate DAP

Urea, Manganese

Ammonia

Gold

Iron Ore, Silver, Potash, Copper, Sulphur

“Worst conditions for 40 years”What are the sources for finance for the mining industry?

7

But – The scarcest of all commodities is $$$

Once bitten, twice shy...…twice

bitten, invest in ABM!

“PEOPLE WITH MONEY” “PEOPLE WITH CHOICES”

“Anything But Mining”

2007 2008 2009 2010 2011 20120

50

100

150

200

250

HKSE

AIM

TSX

TSXV

8

Raising money is tough: number of new listings related to mining has fallen...

DATA: HKE (2012 no data), TSX, AIM.

Number of new listings related to mining

2008 2009 2010 2011 20120

10,000

20,000

30,000

40,000

50,000

AIM ASX

TSX TSXV

9

...and equity raised has fallen even further

DATA: TSX, ASX (mining & metals), AIM [$ million].

$M of equity raised

10

The money is there and as confidence returns, investors make choices to switch to riskier assets

DATA: MSCI World Equities; S&P GSCI Commodities: bond yields are the average of German and US 10 year govt debt; Haver Analytics, CRU

01-Jun-12

11-Jun-12

21-Jun-12

01-Jul-1

2

11-Jul-1

2

21-Jul-1

2

31-Jul-1

2

10-Aug-12

20-Aug-12

30-Aug-12

09-Sep-12

19-Sep-12

29-Sep-12

09-Oct-

12

19-Oct-

12

29-Oct-

12

08-Nov-1

2

18-Nov-1

2

28-Nov-1

2

08-Dec-1

2

18-Dec-1

2

28-Dec-1

2

07-Jan-13

17-Jan-13

27-Jan-13

06-Feb-13

16-Feb-13

26-Feb-13

80

90

100

110

120

130 1.0

1.1

1.2

1.3

1.4

1.5

1.6

1.7

1.8

1.9

Commodities Equities GoldBond yields (RHS)

01/06/12=100 %

Rising bond yield = falling bond price

» This search delivers a news story from Australia dated Feb 21, 1928- “Exceptional condition of the money market”- “Heavy fall in tin stocks”

» But don’t worry (!!) – the option holders are “still very hopeful” of achieving success before the deadline of March 14...

11

...but we have seen this before

DATA: Google, Sydney Morning Herald, 1928

» As of December 2012: 600 companies on TSX with < $200k working capital

» Feb 2013: 45 of 146 mining companies in AIM have “barely... a year”

» As for ASX: rough estimate of ~100 companies running on “fumes”

12

Exploration is mining’s “R&D” department...

DATA: Personal communication.

“It is not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is most adaptable to change”

Charles Darwin

Will companies fold?

Experience shows that it’s the weakest that adapted fastest...

» Single asset exploration companies : is this the best use of talented management?

» Size does matter–but large is a turn-off for the markets right now…

» Opportunities exist out there and we will see small deals as the junior market “adapts”...

13

..and time has shown it to be resilient

“SMART MONEY IS SORTING THROUGH THE WALKING DEAD...”

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

9m20

11

9m20

12

0

20

40

60

80

100

0

50

100

150

200Bond Proceeds and Volume (2000 – 9m 2012)

Proceeds Number

Num

ber

Proc

eeds

$b

14

What are the majors doing?

DATA: Ernst &Young,(2012) Company sources

C$0.75bln - May 2013€0.75bln bond - Apr. 2013A$1.0 Bln note issue – Oct, 2012€2.0 Bln bond – Sep, 2012£1.75 Bln bond – Sep, 2012€2.0 Bln bond – May, 2012

€1.75 Bln fixed rate notes – Dec, 2012US$3.0 Bln fixed rate bonds – Aug, 2012US$2.5 Bln fixed rate bonds – Mar, 2012

US$1.5 Bln notes – Sep, 2012€0.75 Bln notes – Jul, 2012

» Raising money just fine» Meeting the new boss...

» Capital raising in 2012, lowest since 2008/9

» M&A down – hardly surprising after the last decade binge cost $1.1 trillion and a trinity of CEOs at Rio, BHP and Anglo...

» Consumers (of resources) are investing

15

So – a capital strike or a timely pause?

Iron ore copper Coal Zinc Nickel Uranium Gold Other

What

China Japan India

Aus Africa Asia Latin Amer

ica

FSU Pa-cific

North

America

Eu-rope

0

10

20

30

40

50

60

70

80 Where

16

The big consumers are active overseas, China >> Japan >> India…

DATA: Metal Economics Group.

Of 6,276 active projects in production, feasibility or reserves development: China has involvement in 206, Japan 135 and India 29

Note: Exploration involvement not included

Let’s look at iron oreA market that is great to be in, but if “your name’s not on the list, you can’t come in...”VolatilityWeakening prices?New supply regions emerging?Kazakhstan vs West Africa

Chancery House

53-64 Chancery Lane

London

WC2A 1QS

UK

Tel: +44 20 7903 2000

Fax: +44 20 7903 2172

517, Tower 2

Bright China Chang An

Building

7 Jianguomennei Avenue

Beijing 100005, China

Tel: +86 10 6510 2206

Fax: +86 10 6510 2207

Augusto Leguía Norte

Nº 100 of.506

Las Condes

Santiago

Chile

Tel: +56 2 2231 3900

Fax: +56 2 2231 4314

PO Box 1269

Langley

WA 98260

USA

Tel: +1 360 321 4707

Fax: +1 360 321 4709

B/407, Citi Point, JB Nagar

Next to Kohinoor Hotel

Andheri Kurla Road

Andheri (E) Mumbai 400 059

India

Tel: +91 22 6687 5757

Fax: +91 22 66875758

Jan-0

9

Mar-09

May-09

Jul-0

9

Sep-09

Nov-09

Jan-1

0

Mar-10

May-10

Jul-1

0

Sep-10

Nov-10

Jan-1

1

Mar-11

May-11

Jul-1

1

Sep-11

Nov-11

Jan-1

2

Mar-12

May-12

Jul-1

2

Sep-12

Nov-12

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

18

Through December 2012, steel mill profitability in China improved, lifting sentiment among raw materials buyers…

DATA: CRU.

National EBITDA margin for a sample of Chinese steel mills, %

Note: (1) EBITDA margin is based upon mills selling 50% of their material to contract buyers and 50% on the spot market.

1/Jul/

11

26/Ju

l/11

20/A

ug/11

14/S

ep/11

9/Oct/

11

3/Nov

/11

28/N

ov/11

23/D

ec/11

17/Ja

n/12

11/Feb

/12

7/Mar/

12

1/Apr/

12

26/A

pr/12

21/M

ay/12

15/Ju

n/12

10/Ju

l/12

4/Aug

/12

29/A

ug/12

23/S

ep/12

18/O

ct/12

12/N

ov/12

7/Dec

/12

1/Jan

/130

5

10

15

20

25

30

35

40

45

19

…and encouraging iron ore restocking, alongside a quarter on quarter uptick in underlying demand

DATA: CRU, MySteel.

Note: Sample of 55 small and medium sized steel mills where production in each is less than 5 Mt/y (covering mills in Tangshan, Handan, Xingtai, Shandong, Shanxi).

Imported iron ore inventory on hand on a weekly basis at a sample of Chinese steel mills, days

06 07 08 09 10 11 120

50

100

150

200

250

300

Rio Tinto BHPB FMG

Jan-0

9

Mar-09

May-09

Jul-0

9

Sep-09

Nov-09

Jan-1

0

Mar-10

May-10

Jul-1

0

Sep-10

Nov-10

Jan-1

1

Mar-11

May-11

Jul-1

1

Sep-11

Nov-11

0

5

10

15

20

25

30

35

40

45

50

20

Although Australian exports have surged as majors post robust gains, supply concerns have mounted elsewhere…

DATA: GTIS, Company reports, CRU.

Australian exports of iron ore, Mt Australian iron ore exports by company, Mt

09 10 11 120

10

20

30

40

50

60

21

…as Indian tonnages drop, along with a fall in availability of Chinese port stocks and Brazilian spot cargos in December

DATA: CRU, GTIS.

y/y change in Indian exports of iron ore, %Exports of iron ore from Goa, India, Mt

09 Q

109

Q2

09 Q

309

Q4

10 Q

110

Q2

10 Q

310

Q4

11 Q

111

Q2

11 Q

311

Q4

12 Q

112

Q2

12 Q

312

Q4

13 Q

1

-80%

-60%

-40%

-20%

0%

20%

40%

60%

08 09 10 11 12 13 14 15 16 17-50

-25

0

25

50

0

100

200

300

400

y/y change in Brazil production Vale production

22

In fact, 2012 has been a poor year for Brazilian production given near zero growth in Vale’s output

DATA: CRU, GTIS, CompanyReports.

LHS: y/y change in Brazilian production of iron ore, MtRHS: Production of iron ore from Vale, Mt

23

Worries over supply tightness led to a buying frenzy in China and a spike in prices - iron ore and coal are at near parity

DATA: CRU.

Iron ore spot prices, CFR China, $/t

Note: (1) Spot iron ore refers to 62% Fe fines, CFR China. (2) Spot coking coal refers to hard coking coal, FOB Australia

Differential between spot iron ore(1) and spot coking coal prices (2), $/t

Jan/0

9

Apr/09Ju

l/09

Oct/09

Jan/1

0

Apr/10Ju

l/10

Oct/10

Jan/1

1

Apr/11Ju

l/11

Oct/11

Jan/1

2

Apr/12Ju

l/12

Oct/12

Jan/1

3

Apr/13

0

20

40

60

80

100

120

140

160

180

200

62% Fe fines, CFR China 63.5% Fe fines, CFR China

Jan/1

0

Apr/10

Jul/1

0

Oct/10

Jan/1

1

Apr/11

Jul/1

1

Oct/11

Jan/1

2

Apr/12

Jul/1

2

Oct/12

Jan/1

3

Apr/13

0

20

40

60

80

100

120

140

160

180

200

» CRU believes that underlying demand in China is not as strong as the sharp price decline suggests (Chinese crude steel production higher than demand).

» Iron ore restocking has, temporarily, ceased in China as stock levels are healthy and even on the high side, at near 40 days on hand.

» Mills were becoming increasingly unwilling to accept the higher raw materials prices, given the impact that this is likely to have on margins thanks to the far slower increase in steel prices.

» The beginnings of a reversal in mood emerged in mid-January as many buyers felt the iron ore prices had overshot – some of this was fuelled by market speculation itself.

24

Iron Ore price ceiling found at $141/t – why no higher?

11 Q1 11 Q2 11 Q3 11 Q4 12 Q1 12 Q2 12 Q3 12 Q4 13 Q1 13 Q2 13 Q3 13 Q4 14 Q1 14 Q2 14 Q3 14 Q4-15%

-10%

-5%

0%

5%

10%

15%

20%World China

25

Going forward, we anticipate the strongest gains in Chinese, and thus world, hot metal production next quarter (for 2013)

DATA: CRU, WSA.

q/qchange in world and Chinese hot metal production, Mt

2013World = 5.5%China = 6.3%ç

09 10 11 12 130

50

100

150

200

250

300

350

400

450

500

Brazil

India

26

2013 will be plagued by pockets of weak supply from Brazil and India, keeping market fundamentals tight…

DATA: GTIS, CRU.

Exports of iron ore from Brazil and India, Mt

2009 – 2011India CAGR = -17%Brazil CAGR = 11.5%

2011 – 2013India CAGR = -39%Brazil CAGR = 1.1%

11 Q1 11 Q2 11 Q3 11 Q4 12 Q1 12 Q2 12 Q3 12 Q4 13 Q1 13 Q2 13 Q3 13 Q4 14 Q1 14 Q2 14 Q3 14 Q40

20

40

60

80

100

120

140

160

180

200

-15%

-10%

-5%

0%

5%

10%

15%Australia Growth

27

…however, the effects of this will be tempered by rapid growth from Australian miners

DATA: GTIS, CRU.

LHS: Exports of iron ore from Australia, MtRHS: q/q changes in exports of iron ore from Australia, %

Seasonal dip in supply due to adverse weather

» Growth in steel production (globally) will ease…

» ...so, increases in iron ore demand will also slow

» Europe and Japan will recover (i.e. re-visit 2008 levels by mid-decade), and Middle East growth will be strong

» Q3 price crash knocked the juniors back...

» ...but the majors are expected to continue their expansion (Aus and Brazil > 72% share of total exports by 2017; mainly exploiting India’s reversal from net exporter to net importer (!))

» West African juniors have aggressive plans, although it will be modest by comparison to traditional sources

» Plentiful supply of lower cost ore will increase China’s reliance on imported ore and...

28

Prices will hold steady y/y in 2013, but beyond –prices will weaken...

SOURCE: CRU.

20 30 40 50 60 70 800

50

100

150

200HistoricExponential (Historic)Forecast

08 09 10 11 12 13 14 15 16 1760

70

80

90

100

110

120

29

...this will knock out Chinese marginal production from the market, leading to expectations of falling prices

DATA: CRU, GTIS.

Chinese production of iron ore, indexed, 2008 = 100

Note: prices shown are real, 2012 US dollars.

X-axis: Quarterly Chinese iron ore production, MtY-axis: Spot prices for 62% Fe fines, CFR China, $/t

30

Although smaller mines will close, the government will support consolidation and modernisation...

“PEOPLE WITH MONEY”

“PEOPLE WITH CHOICES”

DATA: CRU.

Representative global cost curve

Ope

ratin

g co

st

Majors

Lower-cost emerging producers

China SOEs/large private mines

China, Small private mines

High-cost emerging producers

XReal prices just slipping below $100 CFR China (62% Fe) by 2017With potential to fall lower into the 2020’s

27%

59%

14%

Exploration

Feasibility

Production

9%9%

82%

Exploration

Feasibility

Production

31

So –what about the next supply region?West Africa vs. Kazakhstan

DATA: MEG, ENRC,Arcelor Mittal, CRU.

Contained Fe by project stage(%)

12 projectsKazakhstan– 0.9 Bt

68 projectsWest Africa – 31.6 Bt

Note: All projects reporting a resource are included

32

On in-situ grade: Africa leads… ...and it’s cheaper to ship iron ore to China from West Africa than from Kazakhstan

“PEOPLE WITH MONEY” “PEOPLE WITH CHOICES”

DATA: MEG. CRU.

Weighted Average Grade Fe contained >50% in-situ

0%

5%

10%

15%

20%

25%

30%

35%

40%Kazakhstan West Africa

Origin Distance Units 2012 2020

Kazakhstan 5,000 $/wmt 100

West Africa 9,727 $/wmt 18.9 28.8

Indo

nesia

Viet

nam

Vene

zuel

a

DRC

Zim

babw

e

Kryg

yzst

an

Boliv

ia

Guat

emala

Philip

pines

Gree

ce

Rom

ania

Mad

agas

car

Hond

uras

Mon

golia

Ecua

dor

India

Kazk

khst

an Mali

PNG

Gunie

a

Russ

ia

China

Surin

ame

Nige

r

Egyp

t

Guya

na

Colom

bia

Sout

h Af

rica

Pana

ma

Tanz

ania

Braz

il

Dom

inica

n Re

publi

c

Zam

bia

Peru

Polan

d

Arge

ntina

Califo

rnia

Burk

ina F

asao

Ghan

a

Turk

ey

Serb

ia

Bulga

ria

Tasm

ania

Spain

Was

hingt

on

Mon

tana

New

Mex

ico

NSW

Mex

ico

Minn

esot

a

Nuna

vut

Idah

o

Mau

ritan

ia

Color

ado

Mich

igan

Quee

nsla

nd BC

NWT

Nam

ibia

Arizo

na

New

Zeala

nd

Mor

occo

Vict

oria

Chile NT

Man

itoba

Alas

ka

Sout

h Au

st

Nfld/

Lab

Cana

da (a

ve)

Bots

wana

Onta

rio

W A

us

Gree

nland

Sask

atch

ewan

Nova

Sco

tia

Queb

ec

Norw

ay

Yuko

n

Utah

Neva

da

Icela

nd

Wyo

ming

New

Bru

nswi

ck

Albe

rta

Swed

en

Finla

nd

0

20

40

60

80

100

33

...even politically Africa is ahead of Kazakhstan

DATA: Fraser Institute Data, March 2013

Policy Potential Index (the “ability to do business” there)

PPI Score

4thQ

3rd Q

2ndQ

1stQ

Canada

Mauritania

GuineaKazakhstan

34

...and politics does impact investment

DATA: MEG, CRU.

Percentage of Fe contained that is owned or optioned by Japan / China / India

39%

61%

Kazakhstan

91%

6% 3%

West Africa

Other Japan China IndiaKazakhstan

Juniors» Investors are exercising choice» Exploration juniors are survivors...

Majors / Operators» Operating costs are the focus and they will come down

General» China and Japan need resources, and it will ever be thus…

Iron Ore» Short term picture looks good, but incumbents hold all the cards…» Kazakhstan starts at a disadvantage to other countries when trying to attract

finance:» Policy climate is non-favourable» Logistics pose great challenge for accessing China etc. Total freight for

iron ore from Kazakhstan to Tianjin port is ~$100/t leaving less profit margin to miners.

35

Summary

Thank-you

Rebecca GordonManaging Consultant CRU Strategiesrebecca.gordon@crugroup.com

Chancery House

53-64 Chancery Lane

London

WC2A 1QS

UK

Tel: +44 20 7903 2000

Fax: +44 20 7903 2172

517, Tower 2

Bright China Chang An

Building

7 Jianguomennei Avenue

Beijing 100005, China

Tel: +86 10 6510 2206

Fax: +86 10 6510 2207

Augusto Leguía Norte

Nº 100 of.506

Las Condes

Santiago

Chile

Tel: +56 2 2231 3900

Fax: +56 2 2231 4314

PO Box 1269

Langley

WA 98260

USA

Tel: +1 360 321 4707

Fax: +1 360 321 4709

B/407, Citi Point, JB Nagar

Next to Kohinoor Hotel

Andheri Kurla Road

Andheri (E) Mumbai 400 059

India

Tel: +91 22 6687 5757

Fax: +91 22 66875758